At yesterday’s Summer Seminar, I was able to corner John C. Nelson, managing director for Moody’s higher education division, who had given a presentation that had impressed a lot of people in the room.

He looked at financial and economic trends in the higher education industry, and what they meant for the bottom line of colleges and universities. They weren’t pretty, but he did give ideas about what institutions had to do to thrive (or at least survive).

The main points and trends — from his slides and my conversation with him:

1)We have a “new normal”:

Colleges are facing fewer resources. Households are still hurting, donations are down, and credit markets have become more skeptical of small colleges. Liquidity is thin, and colleges are suffering from bad debt plans. Tuition increases are dampening down among some colleges, and institutions are having to giving ever-higher discounts. Many face stiff competition from lower-priced alternatives.

The sector is still relatively stable at the moment, however, with no colleges defaulting on credit, though the number of credit-rating downgrades has increased. “There are going to be big advantages for colleges and universities that learn to operate on a more efficient model,” Nelson told me. “But I don’t think that model will change overnight.” Those colleges and universities that can be nimble, efficient, transparent and productive can win big.

They face greater scrutiny by government and the public. Just catch the news to see this one. Disclosure and productivity are crucial in this new environment. There is huge pressure to make college more affordable.

Globalization and technology require scale: All but the elite few need to offer some online education — but larger institutions and networks are necessary to take advantage of new technology and reduce per-student costs. The large institutions will dominate the online sector unless smaller institutions find partners.

Education is in higher demand than before: This is the saving grace, it seems. Technology is feeding a need for education that seems to have no end, and there are no real alternatives to it.

2) Public and private institutions are blurring.The decrease in state funding to public colleges has forced many into taking on a funding model that’s similar to privates’: high tuition and high aid; national and international student recruitment; more aggressive recruitment of donors; borrowing for academic buildings; and cultivation of endowments.

3) They still have their own strengths. They just need to know how to use them.

Public universities’ size gives them economies of scale, so they can use lower prices to compete against privates. They have more diversified revenues, but their management and governance is lagging.

Privates are costlier, more dependent on tuition, and their investments aren’t as easily turned to cash in a crisis. Yet they tend to have better governance and overall management. And their nimble nature means that with the right leadership, they can work with for-profit systems to boost their online offerings and build that scale that larger institutions have — without creating it all from scratch.

In any case, both publics and privates have the internationally known American brand, however, and need to capitalize on that by luring more international students.

4) A shakeout is coming. “I’m not saying I’m in the camp of people saying there’s a massive higher-education bubble,” Nelson said. But in the next 5-10 years, Nelson said, as many as 20 colleges a year could go under. (Up till now, only a handful go under every year.) Over a 10-year period, he said, that could account for 5-10 percent of colleges.

The most vulnerable institutions are:

Small nonprofit, nonselective private colleges with fewer than 1,000 full-time equivalent students — a measure that applies to 40 percent of the sector — that have little diversity in programming (and thus can’t justify their tuition), little or no endowment (and so are dependent on tuition), and which are in a competitive market but located away from major metro centers in demographically weak areas. Religious colleges, among others, fall into that category.

Regional “stand-alone” nonselective public universities that are away from major metro centers in demographically weak areas and, due to declining state funding, are newly dependent on tuition. They face closure or mergers if they can’t hold up. Nelson said Minnesota faces this issue less, because its weaker public institutions can rely to some extent on help from either the University of Minnesota or Minnesota State Colleges and Universities systems. Other states, such as Ohio, Illinois and New Jersey, have many more stand-alone state colleges.

They need to focus on elements such as student- and research performance, supply- and cost containment, and facility and faculty productivity. They must develop new strategies for earning more revenue through online programs, international student recruitment and partnerships.

Remember: Lenders, investors, raters and even suppliers will demand better financial performance and disclosure through more financial reporting and online information and investor liaisons, among other things.

Meanwhile, donors, government and the news media will want proof that colleges are performing for students, taxpayers and their own communities.

About the blogger

Alex Friedrich reports on higher education issues for MPR News. Among the stories he has covered: the fall of the Berlin Wall, aftermath of Hurricane Katrina, collapse of the I-35W bridge in Minneapolis, 2003 Moscow suicide bombing and 2004 presidential elections in the Republic of Georgia. He holds a bachelor’s degree in journalism from the University of Georgia and a master’s in European political economy from the London School of Economics.